How do we select Mutual Funds
At Goalwise we use a data-driven and backtested Mutual Fund selection strategy that has given market-beating returns in the past.
We take into account multiple variables like past returns (short, medium and long term), consistency, alpha, size etc to select Mutual Funds that have a strong chance of giving higher returns in the future.
Of course, we won't get all of them right but this is a very important point. Many popular Mutual Fund lists/ratings are just trying to predict the past i.e. they are just shortlists of funds ranked by some arbitrary combination of parameters without any proof of their predictive value. For e.g. just because a fund has given high returns in the last 3/5/10 years does not automatically mean it will give high returns in the next 3/5/10 years.
Worse, almost none of these lists/ratings publish any track record of their predictions either i.e. how would an investor have fared if she invested in their 'top recommendations' after they recommended it.
We update our recommendations at the beginning of every year where we take the latest Mutual Fund data into account and re-run our predictive algorithms to come up with the best funds for that year. Again, we won't get all of them right, but on average over the long term we should do better.
Top Mutual Funds for 2020
Tax Save (ELSS under section 80C of the IT Act - 3 year Lock-in):
- Axis Long Term Equity Fund - Growth
- Canara Robeco Equity Tax Saver Fund - Growth
- Mirae Asset Tax Saver Fund - Growth (New)
Risk category: Low (Large Cap Funds)
- Axis Bluechip Fund - Growth
- HDFC Index Fund - Sensex Plan - Growth
- Canara Robeco Bluechip Equity Fund - Growth
Risk category: Moderate & High (Multicap Funds)
- Axis Focused 25 Fund - Growth
- SBI Focused Equity Fund - Growth (New)
- Kotak India EQ Contra Fund - Growth
- Motilal Oswal Nifty 500 Fund - Growth (New)
Risk Category: Low/Moderate/High
Smarter Savings (substitute for savings account or FD; no exit load):
- Kotak Savings Fund - Growth
- Aditya Birla Sun Life Savings Fund - Growth
- IDFC Low Duration Fund - Growth
Emergency Goal (Liquid funds with Instant Redeem option):
- Nippon India Liquid Fund - Growth (earlier known as Reliance Liquid Fund)
- Aditya Birla Sun Life Liquid Fund - Growth
Note: The yield (interest rate) for the debt funds above is currently 5.75-6% (as on Jan 3, 2020) because of the several rate cuts in 2019. Hence, this is what we should expect the returns from our debt funds to be in 2020 until the interest rates go back up.
Why have we added a multicap index fund?
Motilal Oswal Nifty 500 Fund is a multicap index fund tracking the Nifty 500 TRI index. The Nifty 500 TRI index represents the top 500 companies by market capitalisation. This covers large cap companies (top 100 companies), mid cap companies (next 150 companies) and small cap companies (next 250 companies) weighted by their individual market caps.
The reason to include an index fund in the multicap category is that although multicap funds have historically performed better than the index over the long-term but they are starting to show underperformance over the last 3 years.
Data as on 30th Nov 2019. Source.
As you can see from the above table, the average multicap fund has underperfomed the Nifty 500 TRI index over the last 2 and 3 years and just about matched the index over 5 and 7 years.
Thus, an index fund like Motilal Oswal Nifty 500 Fund with expense ratio of just 0.38% (as on 3rd Jan 2020) is a good cheap way to invest for the long term in the multicap space.
Also when we invest in index funds, frequent changing of funds is not required which will help us minimise capital gains taxes.
Why no Mid & Small cap funds in the high risk category?
There are three reasons for this -
a) Risk is determined more by the equity-debt asset allocation than the type of equity or debt funds you are investing in. Under high risk selection, we have an up to 100% allocation to equity which makes it 'risky' enough.
b) Multicap funds already have 20-30% exposure to mid & small cap stocks which is good enough even for high risk profile investors. Also, in Multicap funds, if the fund managers sense more opportunity in mid & small cap stocks, they can easily allocate more to them as they are not restricted to any specific market cap. Hence there is no need to add separate Mid & Small cap funds.
c) Last but not the least, over the past years we have observed that most investors who think they have a high risk profile actually dont have one. They are prone to panicking at the slightest negative returns and then they blame the fund selection. Having mid & small cap funds just exacerbates this issue.
We also allow our investors to choose their own funds while investing but we do not encourage it since we don't know how these funds have been selected and when to replace them since they are already not on the top of our list. So in effect such goals then go out of the purview of our advisory.
We have partnered with the following Mutual Fund companies and ALL of their funds are available with us:
Aditya Birla Sun Life Mutual Fund
Axis Mutual Fund
Baroda Mutual Fund
Canara Robeco Mutual Fund
DSP Mutual Fund
Edelweiss Mutual Fund
Franklin Templeton Mutual Fund
HDFC Mutual Fund
ICICI Prudential Mutual Fund
IDFC Mutual Fund
Invesco Mutual Fund
Kotak Mutual Fund
L&T Mutual Fund
Mirae Mutual Fund
Motilal Oswal Mutual Fund
PPFAS Mutual Fund
Principal Mutual Fund
Quantum Mutual Fund
Nippon India Mutual Fund (earlier Reliance Mutual Fund)
SBI Mutual Fund
Sundaram Mutual Fund
TATA Mutual Fund
UTI Mutual Fund